Federal Reserve Chairman Ben Bernanke said yesterday that “consideration of a fiscal package by the Congress at this juncture seems appropriate”. President Bush is open to the idea, and Nancy Pelosi is chomping at the bit to pass it during the lame duck session after the election. It is almost certain the pass, and the size I have seen tossed around is $300 Billion.
What will the stimulus do?
I will assume for now that the stimulus is once again a simple mail out of checks. I have heard of other spending possibilities, but it has all been rather vague. Even some free market types who have not completed their Jedi training, would have you believe that all we are doing is borrowing future growth for present growth. The costs, they believe, are small to reduce the hardship of recession.
However, there is an additional problem with the “stimulus” that reveals that it will do nothing to help the economy, just like the first “stimulus”. To pay for it, the government will have to borrow funds from the capital market. To induce private holders of capital to loan money to the government they have to increase interest rates to gain a larger share of the capital market. This increased demand on capital causes all interest rates to rise as people and their businesses compete for the limited supply of capital. An increase in the real interest rate makes the rate of return on business investments lower, and thus fewer private business deals happen. In short, less economic growth in the private sector offsets the increase in the economic growth in the public sector.
In general, the stimulus will be a net drag on the economy. It’s really a stretch to believe that forgoing long-term business investments in hopes that individuals will profligately gobble up our limited resources is good for the economy. Don’t gripe at AIG for spending precious funds on spa treatments for sales reps, when your economic plan relies on Americans doing the exact same thing.
Tuesday, October 21, 2008
Saturday, October 18, 2008
Government Run Health Insurance: More Hope than Reality
In 1993, President Clinton tried to pass a single payer government run healthcare system, derisively labeled “HillaryCare” as Hillary became the first First Lady to take on such a public role. This system was to move the United States to a system like the U.K. where the government owns all the hospitals and clinics, and employs all of the doctors. Because of the failure of HillaryCare and the truly abhorrent stories that come out of Canada and the U.K., Democrats have now switched to pushing government run health insurance. Barack Obama is pushing his own version on the campaign trail.
The question then becomes, did these arrangements cost as little as promised where they have been tried in the United States.
Romney Care
Mitt Romney, former governor of Massachusetts and Republican Presidential Primary Candidate helped craft a universal health care plan for that state. Included in that plan was a subsidized health care insurance program called Commonwealth Care. It was designed to offer competitive insurance for those currently without insurance and incomes below 300% of the federal poverty line. (For a family of 4 that would be $63,600 a year.)
The insurance program was supposed to be relatively inexpensive. Like Obama’s plan there is a fine for not signing up for insurance. The theory went that if they could pool all the uninsured, including a large number of young people who use very little medical services, the premiums wouldn’t have to be very high. This is the essence of Barack Obama’s plan as well.
Did the plan stay in budget? Not by a long shot. According to Massachusetts Governor Patrick’s new 2009 budget, how big will this next year’s budgeted amount and increase have to be?
“$869 million for Commonwealth Care, an 84 percent increase over the fiscal year 2008 General Appropriations Act”
Furthermore, according to an article from the Boston Globe:
“...the state expects to spend substantially more for insurance subsidies than the $869 million Governor Deval Patrick proposed in his 2009 budget just two months ago, because of increasing enrollment and higher payments to insurers. In private briefings, she has told coalition members that the cost could be $100 million more, according to several who were present.”
If you do the math, that’s a 105% increase in costs for the program in a single year.
Keiki Care
In 2007, Hawaii created a free insurance program called Keiki (Child) Care. Like the SCHIP expansion championed by the Democrats and vetoed by President Bush in the same year, children who’s parent(s) made too much to qualify for Medicaid could get free basic health insurance.
The Washington Times quoted the President after vetoing the SCHIP expansion:
"If this bill were enacted, one out of every three children moving onto government coverage would be moving from private coverage."
When Hawaii passed a very similar program, what happened? According to the Associated Press:
“State health officials argued that most of the children enrolled in the universal child care program previously had private health insurance, indicating that it was helping those who didn't need it.”
"People who were already able to afford health care began to stop paying for it so they could get it for free," said Dr. Kenny Fink, the administrator for Med-QUEST at the Department of Human Services. "I don't believe that was the intent of the program."
So, President Bush was wrong. It was not going to be just 1 out 3 children dropping out of private coverage to get the free government insurance, it was more than 1 out of 2.
What did Hawaii do once they figured out that the insurance plan was going to cost far more than estimated? They ended it, after a mere 7 months. How refreshingly responsible.
Obama’s Plan
What will Obama’s plan cost? Whatever you hear them quote, it could easily be double. Will people drop their private health care coverage to get on the government dole? By the millions. Can we really believe that Obama and his fellow skeptics of the free market could so blindly underestimate the costs of their plans? Everyone together: YES, WE CAN!
The question then becomes, did these arrangements cost as little as promised where they have been tried in the United States.
Romney Care
Mitt Romney, former governor of Massachusetts and Republican Presidential Primary Candidate helped craft a universal health care plan for that state. Included in that plan was a subsidized health care insurance program called Commonwealth Care. It was designed to offer competitive insurance for those currently without insurance and incomes below 300% of the federal poverty line. (For a family of 4 that would be $63,600 a year.)
The insurance program was supposed to be relatively inexpensive. Like Obama’s plan there is a fine for not signing up for insurance. The theory went that if they could pool all the uninsured, including a large number of young people who use very little medical services, the premiums wouldn’t have to be very high. This is the essence of Barack Obama’s plan as well.
Did the plan stay in budget? Not by a long shot. According to Massachusetts Governor Patrick’s new 2009 budget, how big will this next year’s budgeted amount and increase have to be?
“$869 million for Commonwealth Care, an 84 percent increase over the fiscal year 2008 General Appropriations Act”
Furthermore, according to an article from the Boston Globe:
“...the state expects to spend substantially more for insurance subsidies than the $869 million Governor Deval Patrick proposed in his 2009 budget just two months ago, because of increasing enrollment and higher payments to insurers. In private briefings, she has told coalition members that the cost could be $100 million more, according to several who were present.”
If you do the math, that’s a 105% increase in costs for the program in a single year.
Keiki Care
In 2007, Hawaii created a free insurance program called Keiki (Child) Care. Like the SCHIP expansion championed by the Democrats and vetoed by President Bush in the same year, children who’s parent(s) made too much to qualify for Medicaid could get free basic health insurance.
The Washington Times quoted the President after vetoing the SCHIP expansion:
"If this bill were enacted, one out of every three children moving onto government coverage would be moving from private coverage."
When Hawaii passed a very similar program, what happened? According to the Associated Press:
“State health officials argued that most of the children enrolled in the universal child care program previously had private health insurance, indicating that it was helping those who didn't need it.”
"People who were already able to afford health care began to stop paying for it so they could get it for free," said Dr. Kenny Fink, the administrator for Med-QUEST at the Department of Human Services. "I don't believe that was the intent of the program."
So, President Bush was wrong. It was not going to be just 1 out 3 children dropping out of private coverage to get the free government insurance, it was more than 1 out of 2.
What did Hawaii do once they figured out that the insurance plan was going to cost far more than estimated? They ended it, after a mere 7 months. How refreshingly responsible.
Obama’s Plan
What will Obama’s plan cost? Whatever you hear them quote, it could easily be double. Will people drop their private health care coverage to get on the government dole? By the millions. Can we really believe that Obama and his fellow skeptics of the free market could so blindly underestimate the costs of their plans? Everyone together: YES, WE CAN!
My Long Lost Twin
I happened to be doing a little surfing of Econ blogs and found this blog post at The New Yorker Magazine by James Surowiecki. His post is virtually identical to one I posted on Friday. Even though the article was an AP story available in many locations he linked the exact same yahoo news source that I used in my post.
October 17, 2008
No, This Is Good News
Trying to explain why markets are acting in a particular way on a particular day is a classic mug’s game (although I should say that it’s a game that I myself will play in another post later today). Nonetheless, it’s good that everyone in the financial media is constantly trying to do it, because it helps clarify the assumptions that shape their view of the economy.
Take, for instance, this headline from this morning’s A.P. story on pre-market action: “Stocks open lower after data show larger-than-expected drop in new home construction.” The assumption in that headline is that a big drop in new home construction is a bad thing for the economy. And it’s true that in the short run, the drop in home construction is not great for construction companies, homebuilders, equipment manufacturers, etc. But for the economy as a whole, this drop is actually a very good thing. In fact, it’s precisely what we want.
One of the biggest problems the economy faces is the mismatch between supply and demand in the housing market, because of the lingering effect on prices of the housing bubble (prices are still too high in much of the country), and because there was massive overbuilding in much of the country. So things that get supply and demand back into sync—like steep cutbacks in the number of new homes being built—are good things. This really is a case of short-term pain leading to long-term gain. And I suspect that investors probably understand that, even if the A.P. thinks they don’t.
October 17, 2008
No, This Is Good News
Trying to explain why markets are acting in a particular way on a particular day is a classic mug’s game (although I should say that it’s a game that I myself will play in another post later today). Nonetheless, it’s good that everyone in the financial media is constantly trying to do it, because it helps clarify the assumptions that shape their view of the economy.
Take, for instance, this headline from this morning’s A.P. story on pre-market action: “Stocks open lower after data show larger-than-expected drop in new home construction.” The assumption in that headline is that a big drop in new home construction is a bad thing for the economy. And it’s true that in the short run, the drop in home construction is not great for construction companies, homebuilders, equipment manufacturers, etc. But for the economy as a whole, this drop is actually a very good thing. In fact, it’s precisely what we want.
One of the biggest problems the economy faces is the mismatch between supply and demand in the housing market, because of the lingering effect on prices of the housing bubble (prices are still too high in much of the country), and because there was massive overbuilding in much of the country. So things that get supply and demand back into sync—like steep cutbacks in the number of new homes being built—are good things. This really is a case of short-term pain leading to long-term gain. And I suspect that investors probably understand that, even if the A.P. thinks they don’t.
Friday, October 17, 2008
Fewer Housing Starts is Good News, Not Bad
Another AP article. This time at Yahoo!Finance. The lead story on their site says "US stocks set to open lower after housing data". In their imbecilic efforts to attribute every stock movement to a news story they misunderstand that this is good news for the financial panic.
Home prices across the United States are still falling. Not as quickly as they were earlier this year, but most major markets are still dropping. The price of anything falls for the sole reason that there is more of the product than people want to buy at the current price. What would be truly scary is if home construction was increasing during a glut.
For all of these mortgage backed securities to attract investors we need the price of the underlying assets (houses) to stop falling. Few want to buy these securities because they are uncertain what they will eventually be worth (Well, security holders are also hoping the Hank Paulson is going to give them an above market price). The more rapid the decline in home construction, the sooner we hit the bottom of the contraction. In short, not only is it good news that home construction is declining, but it is better news that home construction is declining faster than originally predicted.
Home prices across the United States are still falling. Not as quickly as they were earlier this year, but most major markets are still dropping. The price of anything falls for the sole reason that there is more of the product than people want to buy at the current price. What would be truly scary is if home construction was increasing during a glut.
For all of these mortgage backed securities to attract investors we need the price of the underlying assets (houses) to stop falling. Few want to buy these securities because they are uncertain what they will eventually be worth (Well, security holders are also hoping the Hank Paulson is going to give them an above market price). The more rapid the decline in home construction, the sooner we hit the bottom of the contraction. In short, not only is it good news that home construction is declining, but it is better news that home construction is declining faster than originally predicted.
Shock! Free Gov't Healthcare Had Bad Incentives
This is just an AP article, but I think it illustrates well the problems with offering free healthcare to certain citizens who "need" it for free. The state of Hawaii quickly figured out that providing free health insurance for middle class children was a bad idea. This also proves that President Bush's reasons for vetoing the SCHIP expansion was completely accurate when he said that it would encourage those with coverage to drop it in favor of the cheaper government subsidized health care.
"People who were already able to afford health care began to stop paying for it so they could get it for free," said Dr. Kenny Fink, the administrator for Med-QUEST at the Department of Human Services. "I don't believe that was the intent of the program."
State health officials argued that most of the children enrolled in the universal child care program previously had private health insurance, indicating that it was helping those who didn't need it.
The universal health care system was free except for copays of $7 per office visit.
"People who were already able to afford health care began to stop paying for it so they could get it for free," said Dr. Kenny Fink, the administrator for Med-QUEST at the Department of Human Services. "I don't believe that was the intent of the program."
State health officials argued that most of the children enrolled in the universal child care program previously had private health insurance, indicating that it was helping those who didn't need it.
The universal health care system was free except for copays of $7 per office visit.
Wednesday, October 15, 2008
Irrational Investors?
Today, I wanted to talk about something a little more philosophical. In the world of economics there seems to be quite the debate over people behaving rationally versus irrationally. We are told repeatedly these past few weeks that investors are behaving irrationally. That we humans are digressing into the primitive parts of our brains and basing decisions on emotion and not on reason. This is where I disagree. I do not think that irrational behavior is even possible.
First, let’s define rational and irrational behavior. If, like some seem to think, that rational behavior is based on facts and irrational behavior is not based on facts, then this makes it difficult for me to conceive of an irrational thought. Do investors panic for no reason at all? Is it merely a phenomenon where many people randomly panic and start to sell everything? Not likely. As has been the case in recent weeks, dark clouds have been slowly growing for months. People were acting on facts.
Now the retort will be that people oversold in the market, and that they were selling stocks whose true value is more than current prices. More simply, that people are acting on a limited number of facts, but not on the full truth. If the definition of rational behavior requires omniscience, this creates an impossible hurdle and no thought can be considered rational.
As an example, imagine that you are in the middle of a crowded theater and a teenage boy yells “Fire!” Should you race to the rear exit, or stay in your seat assuming the kid is just pulling a prank? I would say that either choice is rational depending on what you know. Is it irrational to flee a burning building? Is it irrational to ignore some teenager yelling “Fire!” when you can’t see it or smell anything? Neither is irrational given the information that you have at the time. If in reality there was an unlit exit at the side of the theater that no one else could see, this would not make the other thoughts irrational.
Many people invest without much knowledge of finance or economics. They generally stick to a few rules about their choices. Their brokers tell them to “buy and hold” and not to try to time the market. These are nice rules, but in 1929 in the U.S. and 1989 in Japan these were horrible strategies. It took 23 years for the DJIA to recover its losses and the Nikkei is less than a quarter of its 1989 high (was 38957 is ~9600).
What naïve investors often do is look at trends (i.e. they extrapolate). Extrapolation is a very important and rational approach to life, but it is a very inaccurate way to judge stock prices. If floodwaters are rising, extrapolation tells you to get the heck out of there. We don’t call people irrational because they didn’t know that a 5 inch rain event in their watershed would leave them 3 or 4 feet above the flood waters. When time is of the essence we have to rely on less information. This is rational and pragmatic.
In the long run, those who base their decisions on more precise techniques and more complete sets of information are going to make fewer mistakes, but all decisions are based on limited information and imprecise techniques. The difference between rational and irrational investing in the common lexicon is arbitrary. I conclude that irrational investing does not exist.
In essence, we have economists on the left trying to help protect those who are “irrational”. What they truly are doing is rewarding ignorance by taxing the prepared.
First, let’s define rational and irrational behavior. If, like some seem to think, that rational behavior is based on facts and irrational behavior is not based on facts, then this makes it difficult for me to conceive of an irrational thought. Do investors panic for no reason at all? Is it merely a phenomenon where many people randomly panic and start to sell everything? Not likely. As has been the case in recent weeks, dark clouds have been slowly growing for months. People were acting on facts.
Now the retort will be that people oversold in the market, and that they were selling stocks whose true value is more than current prices. More simply, that people are acting on a limited number of facts, but not on the full truth. If the definition of rational behavior requires omniscience, this creates an impossible hurdle and no thought can be considered rational.
As an example, imagine that you are in the middle of a crowded theater and a teenage boy yells “Fire!” Should you race to the rear exit, or stay in your seat assuming the kid is just pulling a prank? I would say that either choice is rational depending on what you know. Is it irrational to flee a burning building? Is it irrational to ignore some teenager yelling “Fire!” when you can’t see it or smell anything? Neither is irrational given the information that you have at the time. If in reality there was an unlit exit at the side of the theater that no one else could see, this would not make the other thoughts irrational.
Many people invest without much knowledge of finance or economics. They generally stick to a few rules about their choices. Their brokers tell them to “buy and hold” and not to try to time the market. These are nice rules, but in 1929 in the U.S. and 1989 in Japan these were horrible strategies. It took 23 years for the DJIA to recover its losses and the Nikkei is less than a quarter of its 1989 high (was 38957 is ~9600).
What naïve investors often do is look at trends (i.e. they extrapolate). Extrapolation is a very important and rational approach to life, but it is a very inaccurate way to judge stock prices. If floodwaters are rising, extrapolation tells you to get the heck out of there. We don’t call people irrational because they didn’t know that a 5 inch rain event in their watershed would leave them 3 or 4 feet above the flood waters. When time is of the essence we have to rely on less information. This is rational and pragmatic.
In the long run, those who base their decisions on more precise techniques and more complete sets of information are going to make fewer mistakes, but all decisions are based on limited information and imprecise techniques. The difference between rational and irrational investing in the common lexicon is arbitrary. I conclude that irrational investing does not exist.
In essence, we have economists on the left trying to help protect those who are “irrational”. What they truly are doing is rewarding ignorance by taxing the prepared.
Tuesday, October 14, 2008
One Crisis Begats Another
Unemployment rates have been rising, which is unfortunate. I have lost my job before and I think that these people should do exactly like I did. Namely, mail out dozens of resumes, make phone calls, send e-mails, contact recruiters, and start looking at other cities where you might consider work. My wife was pregnant at the time, so I had a big incentive to quickly find another job. However, our unemployment insurance system eases the pain and lessens the incentive for many to quickly take another job.
Here in the United States we get a small percentage (bigger if you don't make much) of our previous salary for 26 weeks. Every week you have to file information showing that you applied for a certain number of jobs. In Germany, they have had an unemployment insurance system that paid 80% of previous salary for 2 years. They required no evidence that re-employment was being pursued by the recipient of funds. Not too surprisingly, America's unemployment rate hovers around 5%, while Germany's unemployment rate hovered around 9 or 10%.
Now, Barack Obama and Nancy Pelosi have both suggested that we extend unemployment benenfits and temporarily eliminate income tax on those benefits. CBS News quotes Obama as saying "we should extend expiring unemployment benefits to those Americans who've lost their jobs and can't find new ones." This summer, the Democrats added a rider to an Iraq War Funding bill that extended unemployment benefits by 13 weeks to a total of 39. Now, Obama is asking for an additional 13 weeks. What do you suppose will happen if we extend unemployment benefits? Higher unemployment? You are correct.
John Lott, whom I've had the pleasure of conversing with a few times, has an op-ed at Investor's Business Daily writes about the effects of the first extension of unemployment benefits driving up unemployment:
Indeed, dozens of economic research papers predicted this outcome. When you extend or increase jobless benefits, you extend unemployment. If you set a date certain for getting rid of benefits, people find jobs. You get more of what you subsidize, and here we are subsidizing unemployment.
...
For the benefit hike that just took effect, these research papers imply a rise in unemployment to 6.4% from 5.5% in June. So, for the next month or two expect to see repeated bad news from labor markets. Perfect timing for the Democrats for the election.
Now, if unemployment rises another 0.9% to 7.3%, what do you suppose the Democrats will do at that point? Almost assuredly they will use the high unemployment rate as an excuse to expand government intervention in the economy. Their cure for the "unemployment crisis" will only exacerbate the situation and the failed results will be used to justify even more market distortions.
It's Crisis and Leviathan.
Here in the United States we get a small percentage (bigger if you don't make much) of our previous salary for 26 weeks. Every week you have to file information showing that you applied for a certain number of jobs. In Germany, they have had an unemployment insurance system that paid 80% of previous salary for 2 years. They required no evidence that re-employment was being pursued by the recipient of funds. Not too surprisingly, America's unemployment rate hovers around 5%, while Germany's unemployment rate hovered around 9 or 10%.
Now, Barack Obama and Nancy Pelosi have both suggested that we extend unemployment benenfits and temporarily eliminate income tax on those benefits. CBS News quotes Obama as saying "we should extend expiring unemployment benefits to those Americans who've lost their jobs and can't find new ones." This summer, the Democrats added a rider to an Iraq War Funding bill that extended unemployment benefits by 13 weeks to a total of 39. Now, Obama is asking for an additional 13 weeks. What do you suppose will happen if we extend unemployment benefits? Higher unemployment? You are correct.
John Lott, whom I've had the pleasure of conversing with a few times, has an op-ed at Investor's Business Daily writes about the effects of the first extension of unemployment benefits driving up unemployment:
Indeed, dozens of economic research papers predicted this outcome. When you extend or increase jobless benefits, you extend unemployment. If you set a date certain for getting rid of benefits, people find jobs. You get more of what you subsidize, and here we are subsidizing unemployment.
...
For the benefit hike that just took effect, these research papers imply a rise in unemployment to 6.4% from 5.5% in June. So, for the next month or two expect to see repeated bad news from labor markets. Perfect timing for the Democrats for the election.
Now, if unemployment rises another 0.9% to 7.3%, what do you suppose the Democrats will do at that point? Almost assuredly they will use the high unemployment rate as an excuse to expand government intervention in the economy. Their cure for the "unemployment crisis" will only exacerbate the situation and the failed results will be used to justify even more market distortions.
It's Crisis and Leviathan.
Saturday, October 11, 2008
Jonathan Macey Nails It
Jonathan Macey, a law professor at Yale, absolutely nailed the cause of the market collapse in recent weeks. While the market was down, it was panic by the government that caused panic in the private sector. Your average American is not a market expert, so they take their cues from "qualified" individuals. When those that are supposedly in-the-know panic, we all panic.
Some excerpts:
Despite all the hard work and good intentions on the part of our public officials, when economists and historians look back on the current financial crisis they are likely to conclude that government intervention prolonged and deepened it. In particular, officials at the Federal Reserve, the Securities and Exchange Commission and the Treasury Department are to blame for publicly losing confidence in the very economic system they are supposed to protect.
The original Treasury plan -- which called for the transfer of virtually unlimited taxpayer dollars and unlimited spending discretion to Treasury with no judicial or congressional oversight -- sent a very bad signal to the markets. Instead of restoring confidence, this approach to the crisis instilled more fear and panic in the markets.
The Bear Stearns bailout, the restrictions on short-selling and the government's new $700 billion commitment to buy toxic mortgage-based assets all share the same fundamental flaw: They prevent the market from imposing discipline on banks guilty of massive over-leveraging and excessive risk-taking. Moreover, they punish prudent managers who invested conservatively, kept their companies' debt at reasonable levels and worked hard to raise new capital when necessary. The SEC's attack on short-selling punishes savvy traders who invested resources and effort in identifying companies with too much debt and unrealistically valued assets.
Preach on Mr. Macey, preach on.
Some excerpts:
Despite all the hard work and good intentions on the part of our public officials, when economists and historians look back on the current financial crisis they are likely to conclude that government intervention prolonged and deepened it. In particular, officials at the Federal Reserve, the Securities and Exchange Commission and the Treasury Department are to blame for publicly losing confidence in the very economic system they are supposed to protect.
The original Treasury plan -- which called for the transfer of virtually unlimited taxpayer dollars and unlimited spending discretion to Treasury with no judicial or congressional oversight -- sent a very bad signal to the markets. Instead of restoring confidence, this approach to the crisis instilled more fear and panic in the markets.
The Bear Stearns bailout, the restrictions on short-selling and the government's new $700 billion commitment to buy toxic mortgage-based assets all share the same fundamental flaw: They prevent the market from imposing discipline on banks guilty of massive over-leveraging and excessive risk-taking. Moreover, they punish prudent managers who invested conservatively, kept their companies' debt at reasonable levels and worked hard to raise new capital when necessary. The SEC's attack on short-selling punishes savvy traders who invested resources and effort in identifying companies with too much debt and unrealistically valued assets.
Preach on Mr. Macey, preach on.
Thursday, October 9, 2008
Book Review - The Forgotten Man, Amity Shlaes
Amity Shlaes, columnist for Bloomberg, has written an accessible and well paced book chronicling the myriad mistakes of Herbert Hoover, but more significantly, Franklin Roosevelt. While it didn't always dig into the deeper economic consequences with a more academic approach, there was still enough depth to weave a concise narrative of America's misteps during the 1930's. I would likely have torn through the pages of a libertarian polemic, but it was probably better for my blood pressure that she presents a more evenhanded presentation. However, do not fear that she wallows in any left wing apologetics. She does not coddle any of the actors in power.
If you are only vaguely familiar with the events before and during the Great Depression I would recommend picking up a copy. A paperback version is available here at Amazon.
My only warning is not to read this book right after reading Jonah Goldberg's Liberal Fascism and Robert Higgs' Crisis and Leviathan. In his speeches, Barack Obama might as well be quoting some pretty notorious people from the 1930's. It will scare the crap out of you.
If you are only vaguely familiar with the events before and during the Great Depression I would recommend picking up a copy. A paperback version is available here at Amazon.
My only warning is not to read this book right after reading Jonah Goldberg's Liberal Fascism and Robert Higgs' Crisis and Leviathan. In his speeches, Barack Obama might as well be quoting some pretty notorious people from the 1930's. It will scare the crap out of you.
Wednesday, October 8, 2008
Lies about AIG
Doing a little bit of research from my Bio, you would be able to determine that I am currently an employee of AIG. I am not an executive, nor do I even work in the division that set up the retreat. I am also not one of those odd individuals with immense loyalty to my employer. Having said that, there have been several news reports like this one. In the article they report the White House's comments on the events:
The problem with the news story and the wildly inaccurate statements of Sen. Obama, is an enormous ignorance of how insurance is sold in America. Virtually every company that sells life insurance annually offers free trips to the agents that sell the most insurance policies. Think of those crappy fundraisers in grade school where you could get a Nintendo if you sold $5,000 in wraping paper. If an insurance company tried to skip out on these prizes we would likely lose our best sellers to other firms. If we can't sell our insurance products we go out of business. The ruckus compelled our new CEO to send a letter to Hank Paulson, Treasury Secretary. Employees received a copy of the letter at work, but I wasn't sure if it was meant for public distribution so I have not included it.
However, this link here provided an accurate description of the letter.
Executives did not attend the trip. The trip, while costing over $400,000 was attended by over 100 people. My job is in jeopardy, but I hold no ill towards those who attended this event.
The White House said on Wednesday it was "despicable" that American
International Group Inc. executives spent hundreds of thousands of dollars on a
posh California retreat just days after getting a federal bailout.
The problem with the news story and the wildly inaccurate statements of Sen. Obama, is an enormous ignorance of how insurance is sold in America. Virtually every company that sells life insurance annually offers free trips to the agents that sell the most insurance policies. Think of those crappy fundraisers in grade school where you could get a Nintendo if you sold $5,000 in wraping paper. If an insurance company tried to skip out on these prizes we would likely lose our best sellers to other firms. If we can't sell our insurance products we go out of business. The ruckus compelled our new CEO to send a letter to Hank Paulson, Treasury Secretary. Employees received a copy of the letter at work, but I wasn't sure if it was meant for public distribution so I have not included it.
However, this link here provided an accurate description of the letter.
Executives did not attend the trip. The trip, while costing over $400,000 was attended by over 100 people. My job is in jeopardy, but I hold no ill towards those who attended this event.
Shoulda, Coulda, Woulda
How McCain could have trounced his way to victory.
As I watched the debate between McCain and Obama last night, I began to realize that if McCain had voted against the bailout he could completely slaughtered Obama. Had he kept his vote close to the vest and rebuked the bailout at the very end, it would have passed the Senate and likely the House, and Obama would be left holding the blame.
What we now know is that even with the bailout passing, the stock market has tanked anyway. It has fallen over 1200 points since the moment the bailout passed in the House (as of close 10/7/08) . The S&P has fallen almost 14%. McCain would have been called reckless, but with the stock market plunging even with it passing, it would be hard to defend the bailout with evidence. There would be some risks, but it would be a defensible position.
However, the rhetorical gain that McCain could have achieved would have been absolutely lethal. Obama would now be in a position of handing hundreds of billions of dollars to Wall Street to save the greedy and evil CEOs and “Fat Cats” he has been attacking for months. Any use of his class warfare rhetoric would blow up in his face. Tax hikes on the rich, but bailouts for the rich?
Adding to his maverick image, McCain could have stood out as a dogged defender of his principles. When the bailout failed the House, it was then sent to the Senate where it was loaded up with over $100 billion in “sweeteners”, i.e. Pork. Imagine the albatross hanging on Obama’s neck when trying to defend this monstrosity.
Imagine the comebacks…
“You believe that $700 billion is too much to help our troops win in Iraq, but it’s not too much for Wall Street fat cats?”
“Let me get this straight. He has $700 Billion for Wall Street, $800 Billion in new spending on top of a $500 Billion budget deficit, tax cuts for virtually everyone, and he’s going to balance the budget. Does someone have a calculator? I don’t see how this adds up. Because it doesn’t add up. You know it. I know it. He knows it.”
Grrrr…Shoulda, Coulda, Woulda
Note – I do not propose that these rhetorical points are factually precise, but Presidential campaign strategy demands generalities or you will be crushed.
As I watched the debate between McCain and Obama last night, I began to realize that if McCain had voted against the bailout he could completely slaughtered Obama. Had he kept his vote close to the vest and rebuked the bailout at the very end, it would have passed the Senate and likely the House, and Obama would be left holding the blame.
What we now know is that even with the bailout passing, the stock market has tanked anyway. It has fallen over 1200 points since the moment the bailout passed in the House (as of close 10/7/08) . The S&P has fallen almost 14%. McCain would have been called reckless, but with the stock market plunging even with it passing, it would be hard to defend the bailout with evidence. There would be some risks, but it would be a defensible position.
However, the rhetorical gain that McCain could have achieved would have been absolutely lethal. Obama would now be in a position of handing hundreds of billions of dollars to Wall Street to save the greedy and evil CEOs and “Fat Cats” he has been attacking for months. Any use of his class warfare rhetoric would blow up in his face. Tax hikes on the rich, but bailouts for the rich?
Adding to his maverick image, McCain could have stood out as a dogged defender of his principles. When the bailout failed the House, it was then sent to the Senate where it was loaded up with over $100 billion in “sweeteners”, i.e. Pork. Imagine the albatross hanging on Obama’s neck when trying to defend this monstrosity.
Imagine the comebacks…
“You believe that $700 billion is too much to help our troops win in Iraq, but it’s not too much for Wall Street fat cats?”
“Let me get this straight. He has $700 Billion for Wall Street, $800 Billion in new spending on top of a $500 Billion budget deficit, tax cuts for virtually everyone, and he’s going to balance the budget. Does someone have a calculator? I don’t see how this adds up. Because it doesn’t add up. You know it. I know it. He knows it.”
Grrrr…Shoulda, Coulda, Woulda
Note – I do not propose that these rhetorical points are factually precise, but Presidential campaign strategy demands generalities or you will be crushed.
Tuesday, October 7, 2008
I Don't Mean to Brag, but...
Since September 23, the S&P 500 Index has dropped over 11%. What’s interesting about September 23rd? Nothing, except that was the day that I decided to sell half of my stocks (which are almost entirely in S&P 500 index funds) and move the money into an interest bearing account. My strategy until that date was buy and hold. I have never tried to time the market, so why would I start on September 23rd? My faith in the free market led me to fear that the single largest intervention in the history of the American economy could only lead to stagnation in the stock market.
Let me explain in a little more detail, however, why I did not and do not like the bailout. The bailout, eh hem, excuse me, the “rescue plan” is specifically designed to attract capital away from successful uses and put it back into failing financial services firms. This misallocation of capital will slow the economy’s recovery.
The theory for the bailout says that panic set into the first circle of financial services firms and spread to other institutions. The panic would continue to spiral in a vicious circle until all commerce stopped and no credit would be offered anywhere. Those on the Left allege that this cycle of greed and bust is an endemic problem of an unbridled free market and could become permanent, holding the economy back for years and years. Washington, being beset by that other human frailty, panic, simply had to pass the bailout. Investors, seeing the brilliance of Congress, proceeded to pull money out of the market in droves, dropping the Dow Jones Industrial Average down 1,200 points in the next 8 hours of trading.
The problem that I have with the bailout thinking is three fold. To have a “credit freeze”, enormous amounts of capital must be withdrawn and hoarded metaphorically if not literally under the mattress. Eventually, people are going to use that capital again. People won’t forget how to make medicine, drill for oil, or program computers. The incentive to exchange what I can produce, but don't need today, for what you can produce and I do need today will still be there. The economy will go on.
Second, as the panic pushes prices down the opportunity to make a killing gets bigger. I suspect that if the Porsche dealer in town were panic selling Carreras at 20 cents on the dollar, I would not be the only person in line. Many of the “toxic” mortgage backed securities already offer fantastic rates of return with little risk if you hold them to maturity. Now the government plans to borrow $700 Billion from the public. To get us to lend them the money they have to convince us, with higher interest rates, that loaning them money is better than loaning money to other businesses. This moves capital away from companies with sound business models and moves it to those without sound business models. This decision to move capital away from good companies will slow economic growth and the rate of return available in the market.
Lastly, banks are not necessarily the best arrangement to help capital find its most productive use. With the advent of the internet, we have seen the demise of many a middleman. The music industry is in shambles because entertainers no longer need the lumbering distribution companies thanks to iTunes. Venture capital funds capitalize the tech industry in Silicon Valley, not banks. The next Google does not dress up and go down to First National of San Jose to get a small business loan. Even the news industry is dying because bloggers connect average people with news and ideas that need no filtration and distribution. If someone in Minnesota wants to find out about a news conference at a NASA, they don’t have to read a reporter’s opinion, they can watch it on YouTube. Innovation should not be stifled by helping the old guys stay in business.
Banks are inherently unstable by design. They guarantee a rate of return to depositors and then loan out the money to someone else. A bank invests on the margin, also known as leverage. Banks have a nasty habit of getting over leveraged leading even small panics to become meltdowns. Maybe banks should be allowed to fail because they are simply risky relics that have passed their prime.
You might ask, “How will companies who need loans get money? Where would I put my savings?” Just look at mutual funds. A mutual fund company doesn’t borrow and lend, it only recommends to average people where to put their savings (i.e. their capital) and then charges a fee for the advice and administration. There are hedge funds that allow individuals to lend mortgages directly to other individuals, skipping the whole mortgage bank model. Maybe financial experts should be giving advice instead of taking risks. If we allowed banks to fail the financial services industry might be forced to evolve to a more stable system. What have we chosen to do instead? We have decided to bailout the banks so we can keep doing things the way they have always been done. The bailout keeps the big banks big and status quo humming.
To help you wrap your head around this, let me use a metaphor from nature. When someone yells “Help, help there's a fire!” it's likely to send a chill down the neck of the steeliest men. For years, the forest service instinctively reacted this way trying to douse every fire. They finally realized, however, that nature needs those fires to clear out the dead wood, prevent disease, and allow the forest to bloom in new splendor. This bailout, like all meddling, keeps us loaded down with dead wood. It slows growth and reduces opportunities in the economy and the stock market.
Let me explain in a little more detail, however, why I did not and do not like the bailout. The bailout, eh hem, excuse me, the “rescue plan” is specifically designed to attract capital away from successful uses and put it back into failing financial services firms. This misallocation of capital will slow the economy’s recovery.
The theory for the bailout says that panic set into the first circle of financial services firms and spread to other institutions. The panic would continue to spiral in a vicious circle until all commerce stopped and no credit would be offered anywhere. Those on the Left allege that this cycle of greed and bust is an endemic problem of an unbridled free market and could become permanent, holding the economy back for years and years. Washington, being beset by that other human frailty, panic, simply had to pass the bailout. Investors, seeing the brilliance of Congress, proceeded to pull money out of the market in droves, dropping the Dow Jones Industrial Average down 1,200 points in the next 8 hours of trading.
The problem that I have with the bailout thinking is three fold. To have a “credit freeze”, enormous amounts of capital must be withdrawn and hoarded metaphorically if not literally under the mattress. Eventually, people are going to use that capital again. People won’t forget how to make medicine, drill for oil, or program computers. The incentive to exchange what I can produce, but don't need today, for what you can produce and I do need today will still be there. The economy will go on.
Second, as the panic pushes prices down the opportunity to make a killing gets bigger. I suspect that if the Porsche dealer in town were panic selling Carreras at 20 cents on the dollar, I would not be the only person in line. Many of the “toxic” mortgage backed securities already offer fantastic rates of return with little risk if you hold them to maturity. Now the government plans to borrow $700 Billion from the public. To get us to lend them the money they have to convince us, with higher interest rates, that loaning them money is better than loaning money to other businesses. This moves capital away from companies with sound business models and moves it to those without sound business models. This decision to move capital away from good companies will slow economic growth and the rate of return available in the market.
Lastly, banks are not necessarily the best arrangement to help capital find its most productive use. With the advent of the internet, we have seen the demise of many a middleman. The music industry is in shambles because entertainers no longer need the lumbering distribution companies thanks to iTunes. Venture capital funds capitalize the tech industry in Silicon Valley, not banks. The next Google does not dress up and go down to First National of San Jose to get a small business loan. Even the news industry is dying because bloggers connect average people with news and ideas that need no filtration and distribution. If someone in Minnesota wants to find out about a news conference at a NASA, they don’t have to read a reporter’s opinion, they can watch it on YouTube. Innovation should not be stifled by helping the old guys stay in business.
Banks are inherently unstable by design. They guarantee a rate of return to depositors and then loan out the money to someone else. A bank invests on the margin, also known as leverage. Banks have a nasty habit of getting over leveraged leading even small panics to become meltdowns. Maybe banks should be allowed to fail because they are simply risky relics that have passed their prime.
You might ask, “How will companies who need loans get money? Where would I put my savings?” Just look at mutual funds. A mutual fund company doesn’t borrow and lend, it only recommends to average people where to put their savings (i.e. their capital) and then charges a fee for the advice and administration. There are hedge funds that allow individuals to lend mortgages directly to other individuals, skipping the whole mortgage bank model. Maybe financial experts should be giving advice instead of taking risks. If we allowed banks to fail the financial services industry might be forced to evolve to a more stable system. What have we chosen to do instead? We have decided to bailout the banks so we can keep doing things the way they have always been done. The bailout keeps the big banks big and status quo humming.
To help you wrap your head around this, let me use a metaphor from nature. When someone yells “Help, help there's a fire!” it's likely to send a chill down the neck of the steeliest men. For years, the forest service instinctively reacted this way trying to douse every fire. They finally realized, however, that nature needs those fires to clear out the dead wood, prevent disease, and allow the forest to bloom in new splendor. This bailout, like all meddling, keeps us loaded down with dead wood. It slows growth and reduces opportunities in the economy and the stock market.
Subscribe to:
Posts (Atom)